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Sources of Risks Facing Securities Companies

Market Risks

Market risks are the most basic. They are the major risks facing securities companies. Due to a long-standing lack of variety in profitability models, various business lines have shown a tendency toward synchronized movement. When market risks increase, the brokerage business of securities companies faces contraction. This in turn leads to lackluster performance of the proprietary business and the asset-management business. When the market rallies, the proprietary business and asset-management business grow, leading to an increase of transaction volume. This directly drives up revenues from the brokerage business and boosts the underwriting business. Therefore, the various traditional business lines of Chinese securities companies are highly dependent on the condition and trend of the market. They are very vulnerable to instability of income and profit in the face of market risk impacts.

Liquidity Risks

With lower issuance premiums, overall profit goes down, reducing the ability of securities companies to attract capital. Increasing capital by issuing new shares used to be the major financing channel of securities companies. However, with the gradual decline of return on invested capital, fewer means are available for increasing capital through new shares. This undermines the capital adequacy ratios of securities companies. Chinese securities companies dedicate too much of their capital to proprietary business. Compounded by their weakness in fund-raising abilities, this will accentuate the liquidity problem once market risks increase. During the comprehensive purge of securities companies led by the CSRC, most securities companies subjected to administrative liquidation were punished. Suffering from fund deficiency, they appropriated customer assets and funds through institutional loopholes and, finally, exposed themselves to liquidity risks.

 
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